Tishman Speyer: The Grand Walkaway

It’s not just homeowners in Phoenix or Miami who are walking away from their mortgages. Tishman Speyer Properties, a big and you would think sophisticated real estate outfit, is doing the stroll on a $4.4 billion mortgage. The company is turning over the keys to more than 11,000 apartments in New York City’s sprawling Peter Cooper Village and Stuyvesant Town apartment complex in lower Manhattan, which it bought in 2006 through a partnership that includes investment firm Blackrock.

Forget loan modifications; forget Help for Homeowners. This baby was beyond help, though the property’s owners struggled mightily for months to come up with a compromise loan restructuring. That was a big, fat No Go.

The walkaway, first reported by the Wall Street Journal, is bad news for the creditors who inherit a property currently valued at $1.8 billion— or less than half of the outstanding mortgages. That’s what you call deep underwater, and it captures the logic of Tishman Speyer’s chiefs as well as thousands of American homeowners facing a similar upside-down equation. As asset prices decline, and debt does not, the economics of a deal are utterly changed. Default isn’t the guaranteed outcome, but increasingly it’s looking like the logical option.

In fits and starts—and foreclosures– the deleveraging of America’s economy is proceeding apace. It’s not pretty though it is necessary. If not through loan modifications and debt restructurings then it’s going to be through walkaways or in the case of Tishman Speyer and Blackrock, a default followed by a gentlemanly deed-in-lieu of foreclosure, where creditors don’t get cash—but keys.

But the larger take away from Tishman Speyer’s spectacular news is that it is just the latest entry in an expanding log of debt forgiveness that is transforming America’s economy. Whether it is residential homeowners walking away from mortgages they can no longer afford or want, or a super-sized borrowers kissing their assets goodbye, debt written off is debt forgiven.